HISTORY : World Economy: History and Theory

Transcription

1 HISTORY : World Economy: History and Theory Dr. Jari Eloranta Professor of Comparative Economic and Business History Appalachian State University, Department of History Office: Anne Belk Hall 249S (Office hours: see syllabus) Phone: A.1. Two fundamental economic laws related to money -Gresham s Law: Bad money drives out good *If two moneys are recognized, only the cheaper one circulates - Quantity theory : Money and the price level: MV = PY *M: money stock; V: velocity of circulation; P: price level; Y: real output *Each side of the equation represents total nominal value of output *Explains swings in price levels: Rise in European prices with influx of Spanish colonial silver, 16 th century Decline in prices when output outgrew gold supply, 1870s-90s A.2. Rise of Classical Gold Standard -Earlier, silver standard or bimetallic standard common Silver less valuable, thus more practical for smaller transactions Gold used mainly for large transactions -Problem with a bimetallic standard: Gresham s Law If official ratio of values of silver and gold ratio of market prices, then only the relatively cheaper money circulates the metal overvalued at the mint for conversion into coins The relatively expensive money will be hoarded or shipped abroad, where it is worth more 1

2 A.3. Theories of how the classical gold standard functioned Credited with assuring stability in exchange rates, international trade, and financial flows. How? 1. Price specie flow mechanism (David Hume, 1752) In Hume s original version, trade is assumed to be paid for with flows of specie. Thus a country with a trade surplus (exports>imports) accumulates money. This drives up the country s price level (MV=PY), which makes its exports less competitive in foreign markets while also leading residents to switch from higher-priced domestic goods to imports. Thus trade surplus is self correcting. Similarly, a trade deficit reduces money supply and price level, leading to rise in exports and fall in imports also self correcting. Later versions recognized role of paper money: specie does not flow in every transaction, but paper money is exchanged for specie at each country s central bank. Thus specie flows are used to settle imbalances. Two problems with this theory: i. Specie (gold) flows were less common than predicted ii. Net capital (investment) flows were often of similar size as net trade flows but they were neglected in Hume s theory Total balance of payments = net trade flows + net capital flows Recognition of these facts resulted in a new idea: A.3. Theories of how the classical gold standard functioned (cont.) 2. Interest rate mechanism (theory developed c. 1890s 1920s) Adjustment happened largely through interest rates ( discount rates ) set by central banks. Central banks would discount (buy up) the merchant loans ( bills ) of private banks. Increasing the discount rates would reduce the level of discounting while also raising interest rates economy wide. The theory assumed that central banks would more or less automatically raise discount rate in the event of a negative balance of payments (and reduce discount rate in the event of a positive balance). Raising discount rates had 3 effects, all of which contributed to stability: Direct effect on money supply: When CB discounts notes, it injects cash (& credit) into the economy. Less discounting => M falls => P falls, etc. Higher interest rates (with less lending or credit) slow down economic activity, resulting in less importing Higher interest rates stimulate capital inflows (or reduce outflows) Problems with this theory (recognized much later): Central banks did not make all the needed adjustments on a short-term basis (< 1 year) although they did do so on a longer-term basis 2

3 A.3. Theories of how the classical gold standard functioned (cont.) 3. Modern understanding: -The system worked, even without much actual flow of specie, because everyone remained confident that CBs and governments would assure convertibility of paper money into gold Thus, for example, imbalances generate capital flows in anticipation that central banks would later adjust interest rates A.4. Readings on Monetary Standards TWO VIEWS ON GRESHAM S LAW AND THE 19TH CENTURY MONETARY DEVELOPMENTS: 1. Flandreau, Marc (1996), The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, The Journal of Economic History, Vol. 56, No. 4. -Gold Standard did not emerge out of the contradictions of the bimetallism -bimetallism might in fact survived (i.e., Gresham s Law did not prevail) - flaws in conventional accounts: 1) rise in silver production modest; 2) France strong enough to buffer Germany s impact; 3) gold did not dominate silver as an instrument for international transactions; 4) support for gold before 1873 much less homogenous than assumed -overall conclusion: emergence of the Gold Standard was a collective action failure for the international community; political and institutional reasons 3

4 A.4. Readings on Monetary Standards TWO VIEWS ON GRESHAM S LAW AND THE 19TH CENTURY MONETARY DEVELOPMENTS: 2. Greenfield, Robert L. & Hugh Rockoff (1995), Gresham s Law in Nineteenth- Century America. Journal of Money, Credit and Bankiing, Vol. 27, No. 4. -does bad money drive the good money to a premium? U.S. case, evidence of cocirculation? -Gresham s Law: 1) two intrinsically distinct moneys will not both circulate at once, except when because the quantity of one money is limited, that one remains a subsidiary money; 2) of the two moneys, only the bad money will circulate. -gold offered key advantages in 19th century international trade -a dual-currency system never materialized, i.e. Gresham s Law worked! GOOD FURTHER READINGS ON THE GOLD STANDARD: -Eichengreen, Barry & Jeffrey Sachs (1985), Exchange Rates and Economic Recovery in the 1930s. Journal of Economic History, Vol. 45, No. 4. -Eichengreen, Barry (1990), Elusive stability. Essays in the history of international finance, New York. -Eichengreen, Barry (1992), Golden Fetters. The Gold Standard and the Great Depression, New York. WHAT DO YOU THINK? 4

5 A.5. Readings Globalization -A complex issue: economic, political, social, cultural etc. -As an economic phenomenon (implying commodity price convergence), see especially: O Rourke, Kevin H. & Jeffrey G. Williamson (2002), When did globalisation begin? European Review of Economic History, 6. Further material to look at: -Cerny, Philip G. (1995), Globalization and the Changing Logic of Collective Action. International Organization, Vol. 49, No. 4: development of ideas and hypotheses for testing. -Shapiro, Michael J. (1999), Globalization and the Politics of Discourse. Social Text, Vol. 0, No. 60: globalization as a discourse, problematic for empirical, especially quantitative, testing -Kearney, M. (1995), The Local and the Global: The Anthropology of Globalization and Transnationalism. Annual Review of Anthropology, Vol. 24: review of anthropological literature on globalization, localism, Wallerstein s world-system theory -Li, Quan & Rafael Reuveny (2003), Economic Globalization and Democracy: An Empirical Analysis. B.J. Pol. S. 33: impact of globalization, as an economic phenomenon on democratization -Wallerstein, Immanuel (1983), European Economic Development: A Comment on O Brien. The Economic History Review, Vol. 36, No. 4. -O Brien, Patrick (1982), European Economic Development: The Contribution of the Periphery. The Economic History Review, Vol. 35, No. 1. -O Brien, Patrick (1983), European Economic Development: A Reply. The Economic History Review, Vol. 36, No. 4. ANY QUESTIONS ON TODAY S LECTURE? ANYTHING ELSE? 5